PROPOSED RULEMAKINGS

INSURANCE DEPARTMENT

[ 31 PA. CODE CH. 124 ]

Surplus Insurance Lines

[43 Pa.B. 1269][Saturday, March 9, 2013]

The Insurance Department (Department) proposes to amend Chapter 124 (relating to surplus lines insurance) to read as set forth in Annex A. This proposed rulemaking is under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412), regarding the general rulemaking authority of the Department, and Article XVI of The Insurance Company Law of 1921 (act) (40 P. S. §§ 991.1601—991.1626), regarding surplus lines.

Purpose

The purpose of this proposed rulemaking is to update Chapter 124 in accordance with amendments made to the act in 2002, 2010 and 2011. See the act of July 10, 2002 (P. L. 749, No. 110) (Act 110); the act of March 22, 2010 (P. L. 147, No. 14) (Act 14); and the act of June 30, 2011 (P. L. 194, No. 28) (Act 28). Chapter 124 was adopted on March 17, 2000, and sets forth duties and requirements relating to surplus lines agents, writing producers and surplus lines insurers transacting business in this Commonwealth.

Explanation of Regulatory Requirements

The following is a description of the changes in this proposed rulemaking.

A proposed amendment to § 124.3(b) (relating to conditions of binding authority) deletes the requirement that an executed copy of a written contract shall be maintained by the surplus lines licensee in its office ''in this Commonwealth'' in accordance with amendments to section 1610 of the act (40 P. S. § 991.1610) under Act 14, which deleted this requirement.

Sections 124.4 and 124.5 (relating to evidence of insurance; and diligent search of admitted insurers) are proposed to be amended to change ''producing broker'' to ''writing producer'' in accordance with the nomenclature change in Act 14, which were precipitated to ensure consistency of terminology with the act of December 6, 2002 (P. L. 1183, No. 147).

Section 124.5 is proposed to be amended to clarify the documentation necessary to deem that a diligent search was made and to set forth the procedure for obtaining and recording declinations from admitted carriers. Section 124.5 also contains editorial and structural amendments to accommodate the proposed requirements.

Proposed amendments to § 124.6 (relating to export list coverages) revise the procedural filing requirements to accommodate electronic filings consistent with current practices. Specifically, a surplus lines licensee would file a written declaration reporting the transaction involving the placement of coverage which appears on the most recent export list on a form prescribed by the Department.

Section 124.7 (relating to unique forms of coverages) is proposed to be amended to accommodate an editorial change to make the language consistent with § 124.6.

Section 124.8 (relating to surplus lines licensee bond requirements) is proposed to be rescinded in accordance with the elimination of the bonding and residency requirements for surplus lines agents in Act 110.

Section 124.9 (relating to requirements to qualify as an eligible surplus lines insurer) is proposed to be rescinded per amendments to section 1605 of the act (40 P. S. § 991.1605) under Act 28, which were based on the Nonadmitted and Reinsurance Reform Act of 2010 (Pub. L. No. 111-203), which sets forth standards for eligibility of nonadmitted insurers.

Section 124.10 (relating to eligible surplus lines insurer filing requirements) is proposed to be amended to modify required elements of a foreign insurer's request to be considered for placement on the Department's eligible surplus lines insurer list in accordance with amendments to section 1605 of the act made by Act 28.

Section 124.11 (relating to exempt commercial purchaser) is proposed to be added to require a surplus lines licensee to file with the Department a written declaration reporting transactions involving exempt commercial purchasers under section 1610(a.1) of the act, as added by Act 28.

Affected Parties

This proposed rulemaking would apply to surplus lines agents, writing producers and surplus lines insurers transacting business in this Commonwealth.

Fiscal Impact

State government

The proposed rulemaking will strengthen and clarify existing regulatory requirements. There will not be material increase in cost to the Department as a result of this proposed rulemaking.

General public

While the proposed rulemaking will not have immediate fiscal impact on the general public, the general public will benefit to the extent that the proposed rulemaking enhances the efficiency and effectiveness of the Commonwealth's regulation of surplus lines insurance under Article XVI of the act.

Political subdivisions

The proposed rulemaking will not impose additional costs on political subdivisions.

Private sector

The proposed rulemaking will not impose significant costs on surplus lines licensees, writing producers or surplus lines insurers transacting business in this Commonwealth.

Paperwork

The proposed rulemaking will not impose additional paperwork on the Department.

Effectiveness/Sunset Date

The proposed rulemaking will become effective within 30 days after final-form publication in the Pennsylvania Bulletin. The Department continues to monitor the effectiveness of regulations on a triennial basis. Therefore, a sunset date has not been assigned.

Contact Person

Questions or comments regarding the proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, Insurance Department, 1326 Strawberry Square, Harrisburg, PA 17120, fax (717) 705-3873, psalvatore@state.pa.us within 30 days after the publication in the Pennsylvania Bulletin.

Regulatory Review

Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on February 22, 2013, the Department submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Banking and Insurance Committee and the House Insurance Committee. A copy of this material is available to the public upon request.

Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Department, the General Assembly and the Governor of comments, recommendations or objections raised.

MICHAEL F. CONSEDINE,
Insurance Commissioner

Fiscal Note: 11-251. No fiscal impact; (8) recommends adoption.

Annex A

TITLE 31. INSURANCE

PART VIII. MISCELLANEOUS PROVISIONS

CHAPTER 124. SURPLUS LINES INSURANCE

§ 124.3. Conditions of binding authority.

* * * * *

(b) An executed copy of the written contract shall be maintained by the surplus lines licensee in its office [in this Commonwealth]. The copy shall be available at all reasonable times for examination by the Department without notice for at least 5 years following termination of the contract.

(c) If a surplus lines licensee, who is qualified under this chapter to exercise binding authority on behalf of the eligible surplus lines insurer, delegates binding authority to any other surplus lines licensee, the instrument delegating binding authority shall specifically identify the binding authority agreement between the delegating surplus lines licensee and the eligible surplus lines insurer. An executed copy of the instrument delegating binding authority shall be maintained by both the surplus lines licensee delegating binding authority and the surplus lines licensee to whom the authority is delegated in their offices [in this Commonwealth]. The copy shall be available at all reasonable times for examination by the Department without notice for at least 5 years following termination of the contract.

§ 124.4. Evidence of insurance.

(a) Section 1612 of the act (40 P. S. § 991.1612) requires the surplus lines licensee, upon placing surplus lines insurance, to deliver the contract of insurance to the insured or to the [producing broker] writing producer. A cover note, binder or other evidence of insurance shall be delivered by the surplus lines licensee if the contract of insurance is not immediately available.

* * * * *

§ 124.5. Diligent search of admitted insurers.

Under section 1604(2)(i) of the act (40 P. S. § 991.1604(2)(i)), surplus lines insurance may be procured through a surplus lines licensee from nonadmitted insurers if a diligent search is made among the admitted insurers who are writing, in this Commonwealth, coverage comparable to the coverage being sought. The following minimum requirements and conditions apply to the conduct of a diligent search among admitted insurers under section 1604(2)(i) of the act.

(1) Under section 1609(a)(1)(i) of the act (40 P. S. § 991.1609(a)(1)(i)), the [producing broker] writing producer shall execute and forward to the surplus lines licensee a written statement, in a form prescribed by the Department, declaring that a diligent effort to procure the desired coverage from admitted insurers was made. A diligent effort will be deemed to have been made if the writing producer has documented a declination of coverage from at least three admitted insurers which are writing, in this Commonwealth, coverage comparable to the coverage being sought. A declination may be documented by any of the following:

[(i) A diligent effort by the producing broker to procure the desired coverage from admitted insurers shall have been made if the producing broker declares on the prescribed form that at least three admitted insurers which are writing, in this Commonwealth, coverage comparable to the coverage being sought have declined to insure the particular risk.

(ii) A producing broker who obtains a declination from an admitted insurer shall either obtain the declination in writing from the admitted insurer or create a written record of an oral declination by the admitted insurer. A written record of an oral declination shall be made by the person who initially received the declination or by another person working for the business from information transmitted by the person who received the declination. A declination shall be obtained from the admitted insurer or recorded by the producing broker at or near the time of receipt of the declination and maintained in the regular course of business.

(iii) A written record documenting an oral declination shall include:

(A) The name, office location and phone number of the admitted insurer or firm acting in the capacity of underwriting manager for the admitted insurer.

(B) The name and position of the person contacted.

(C) The date of contact.

(D) An explanation of the declination.

(iv) If an admitted insurer fails to respond within 5 business days after first being contacted by the producing broker, the producing broker may assume that the insurer has declined to write the risk. The producing broker shall create a written record of the contact, including the manner in which contact was made and the information required under subparagraph (iii)(A)—(C).

(v) A declination of coverage by an admitted insurer shall be made by a person who is a full-time employe of the admitted insurer and who has underwriting responsibility for that admitted insurer or by a full-time employe of a firm acting in the capacity of underwriting manager for the admitted insurer.]

(i) A written declination from the admitted insurer.

(ii) A written record of an oral declination made by the person who initially received the declination or by another person working for the business from information transmitted by the person who received the declination. The written record must include:

(A) The name, office location and phone number of the admitted insurer or firm acting in the capacity of underwriting manager for the admitted insurer.

(B) The name and position of the person contacted.

(C) The date of contact.

(D) An explanation of the declination.

(iii) A written record that the writing producer contacted an admitted insurer who failed to respond within 5 business days, which includes the manner in which the contact was made and the information required under subparagraph (ii)(A)—(C).

(iv) A written record that the risk does not meet the underwriting guidelines of the admitted insurer. The written record must include:

(A) The name of the admitted insurer.

(B) Reference to the underwriting guidelines upon which the declination is based.

(2) A declination shall be obtained from the admitted insurer or recorded by the writing producer at or near the time of receipt of the declination and maintained for at least 5 years following termination of the contract.

(3) A declination of coverage by an admitted insurer shall be made by a person who is a full-time employee of the admitted insurer and who has underwriting responsibility for that admitted insurer or by a full-time employee of a firm acting in the capacity of underwriting manager for the admitted insurer.

[(vi)] (4) For purposes of this [subparagraph] paragraph, the term ''affiliate'' is used as defined in section 1401 of The Insurance Company Law of 1921 (40 P. S. § 991.1401).

[(A)] (i) A declination may not be obtained from an admitted insurer which is an affiliate of an admitted insurer from which a declination has already been obtained.

[(B)] (ii) Surplus lines insurance may not be placed with a nonadmitted insurer that is an affiliate of an admitted insurer from which a declination has been obtained.

[(C)] (iii) The restrictions in [clauses (A) and (B)] subparagraphs (i) and (ii) do not apply if the affiliated insurers write independently of each other using separate and independently developed underwriting criteria and marketing plans, and for underwriting purposes, compete with each other for the same type of coverage or class of insurance.

[(2)] (5) Under section 1609(a)(2) of the act, the surplus lines licensee shall file with the Department a written declaration of the licensee's lack of knowledge of how the coverage could have been procured from admitted insurers and shall simultaneously file the written declaration of the [producing broker] writing producer required under section 1609(a)(1) of the act. Under section 1609(a)(3) of the act, if the surplus lines licensee acts as both the [producing broker] writing producer and surplus lines licensee in a particular transaction, the surplus lines licensee is required to execute the declarations required under section 1609(a)(1) and (2) of the act.

§ 124.6. Export list coverages.

* * * * *

(c) Within 45-calendar days after the placement of an insurance coverage which appears on the most recent export list published by the Commissioner, the surplus lines licensee shall file with the Department or its designee a [copy of the declaration page of the policy, cover note, binder or other evidence of insurance delivered by the surplus lines licensee in accordance with section 1612(a) of the act (40 P. S. § 991.1612(a)) with the word ''EXPORT'' stamped in red letters in the upper right hand corner] written declaration reporting the transaction on a form prescribed by the Department.

§ 124.7. Unique forms of coverages.

Under section 1604(2)(iii) of the act (40 P. S. § [1604(2)(iii)] 991.1604(2)(iii)), surplus lines insurance may be procured through a surplus lines licensee from nonadmitted insurers if the kind of insurance sought to be obtained from admitted insurers requires a unique form of coverage not available in the admitted market. Within 45-calendar days after a unique form of coverage has been placed, the surplus lines licensee shall file with the Department or its designee, a written declaration reporting the transaction [in] on a form prescribed by the Department.

§ 124.8. [Surplus lines licensee bond requirements] (Reserved).

[(a) The bond required under section 1615(b)(4) of the act (40 P. S. § 991.1615(b)(4)) to be maintained concurrent with the term of a surplus lines agent's license shall be in the amount of at least $50,000 for the initial term of the license.

(b) The amount of the bond required for renewal of a surplus lines agent's license shall be based on the total taxable surplus lines premium volume of the surplus lines agent during the preceding calendar year as reported to the Department of Revenue under section 1621 of the act (40 P. S. § 991.1621) and determined by using the following table:

Total Taxable Surplus

Required Minimum

Lines Premium Volume

Amount of Bond

$0—$1,999,999

$50,000

$2,000,000—$3,999,999

$100,000

$4,000,000—$5,999,999

$150,000

$6,000,000—$7,999,999

$200,000

$8,000,000—and over

3% of the total taxable surplus lines premium volume of the surplus lines licensee during the preceding calendar year or other amount acceptable to the Commissioner.]

[(a) To be considered for placement on the most recent eligible surplus lines insurer list, a nonadmitted insurer shall meet the requirements of the act and this chapter. The nonadmitted insurer shall meet the following requirements:

(1) Currently licensed as an insurer in the state or country of its domicile for the kinds of insurance which it proposes to provide in this Commonwealth.

(2) Either engaged in doing the business of surplus lines insurance in one or more jurisdictions for at least 3 years immediately preceding the filing of an application to be an eligible surplus lines insurer; or an affiliate of an admitted insurer which has been so admitted for at least 3 years immediately preceding seeking approval to do business in this Commonwealth.

(b) In addition to the requirements in subsection (a), an alien insurer shall provide documentation evidencing its inclusion on the most recent quarterly listing of nonadmitted alien insurers which have met the criteria in the plan of operation adopted by the National Association of Insurance Commissioners International Insurers Department, or successor organization.]

§ 124.10. Eligible surplus lines insurer filing requirements.

(a) A request to consider a foreign [nonadmitted]insurer for placement on the Department's eligible surplus lines insurer list under section 1605(b) of the act (40 P. S. § 991.1605(b)) shall be made in writing by [a surplus lines licensee and shall] or on behalf of an insurer and include the following:

(1) [Charter. A copy of the charter of the nonadmitted insurer or similar document and any amendments, additions and deletions thereto certified by the corporate secretary of the nonadmitted insurer.

(2)]Certificate of authority. A copy of the certificate of authority of the insurer or similar document setting forth its authority to issue policies and insure risks in the jurisdiction in which the insurer is incorporated, formed or organized.

[(3)] (2) Financial statement.

(i) A copy of the latest annual financial report or statement of the insurer signed by the officers of the insurer and filed with the insurance regulatory authority or other governmental authority in the jurisdiction in which the insurer is incorporated, formed or organized. The copy [shall] must include all supplemental reports, exhibits and schedules required as part of the annual statement filing [and shall be certified as provided under section 1605(3) of the act (40 P. S. § 991.1605(3))].

(ii) A copy of each subsequent quarterly financial report or statement of the insurer signed by the officers of the insurer and filed with the insurance regulatory authority or other governmental authority in the jurisdiction in which the insurer is incorporated, formed or organized.

[(4) Report of examination. A copy of the most recent report of examination of the insurer conducted by the insurance regulatory authority or similar governmental authority requiring the examination and certified by the proper official of that authority.

(5) Biographical information. Biographical data for each officer, director, person in managerial control, and like individual on a form provided by the Department.

(6)] (3) Kind of insurance. A written statement by an officer of the insurer identifying the kinds of insurance coverages the insurer intends to write and the types of risks the insurer intends to insure in this Commonwealth.

[(7) Designee for service of process. A written designation of the name of the individual employed by the insurer or other appropriate representative to whom all lawful process shall be mailed. The designee shall maintain a legal residence, domicile or office in the United States.

(8)] (4) Additional information. Additional information as may be required by the Commissioner to determine whether the insurer meets the standards and requirements of the act [and this chapter].

(b) After placement on the eligible surplus lines insurer list, a foreign insurer shall submit to the Department [through a surplus lines licensee]:

(1) [Changes or additions, or both, to the information in subsection (a)(7) within 10-calendar days of the occurrence.

(2) Changes or additions, or both, to the information in subsection (a)(1) and (5) within 30-calendar days of the occurrence.

(3) A certified] A copy of the information in subsection [(a)(3)(i)] (a)(2)(i) within 30-calendar days after the date required for filing in its domiciliary jurisdiction. [A copy of the information in subsection (a)(2) shall accompany the filing.]

[(4)] (2) A copy of the information in subsection [(a)(3)(ii)] (a)(2)(ii) within 45-calendar days from the close of the quarter for which the report is prepared.

[(5) A certified copy of the information in subsection (a)(4) within 30-calendar days of the date it became a public document.

(6)] (3) Additional items as may be required by the Commissioner to determine whether the insurer continues to meet the standards under the act.

(c) A request to consider an alien [nonadmitted]insurer for placement on the Department's eligible surplus lines insurer list under section 1605(b) of the act shall be made in writing by [a surplus lines licensee and shall include the following:] or on behalf of an insurer and include documentation evidencing that the insurer is listed on the Quarterly Listing of Alien Insurers maintained by the International Insurers Department of the National Association of Insurance Commissioners.

[(1) Charter. A copy of the charter of the insurer or similar document and any amendments, additions and deletions thereto certified by the corporate secretary of the insurer.

(2) Certificate of authority. A copy of the certificate of authority of the insurer or similar document setting forth its authority to issue policies and insure risks in the jurisdiction in which the insurer is incorporated, formed or organized.

(3) Annual financial statement.

(i) Two copies of the latest annual financial report of the insurer signed by the officers of the insurer and filed with the insurance regulatory authority or other governmental authority in the jurisdiction in which the insurer is incorporated, formed or organized. One copy of the financial report or statement shall be expressed in language and currency of the place of incorporation, formation or organization of the insurer and the other copy prepared and expressed in the English language and United States currency at the current rate of exchange as of the statement date. Certification of the financial report or statement shall be in accordance with section 1605(3) of the act (40 P. S. § 991.1605(3)).

(ii) A copy of the latest annual financial statement of the insurer in the standard reporting format prescribed by the National Association of Insurance Commissioners' International Insurers Department, or successor organization.

(4) Trust fund agreement.

(i) A copy of the trust fund agreement concerning the trust fund which the insurer maintains in the United States in either a National bank or a member of the Federal Reserve System in an amount as set out in the act for the protection of all of its policyholders in the United States, consisting of cash, securities, letters of credit or investments of substantially the same character and quality as those which are eligible investments for admitted insurers authorized to write like kinds of insurance in this Commonwealth.

(ii) The trustees of the trust fund shall give written verification of the amount initially deposited and presently on deposit by the insurer in the trust fund. The trustees shall immediately give written notification to the Department at any time the trust fund deposit is less than the minimum requirement as provided for in section 1605(a)(2)(i) of the act.

(5) Biographical sketches. Biographical data for each officer, director, person in managerial control, and like individual on a form provided by the Department.

(6) Kind of insurance. A written statement by an officer of the insurer identifying the kinds of insurance coverages the insurer intends to write and the types of risks the insurer intends to insure in this Commonwealth.

(7) Designee for service of process. A written designation of the name of the individual employed by the insurer or other appropriate representative to whom all lawful process shall be mailed. The designee shall maintain a legal residence, domicile or office in the United States.

(8) Additional information. Additional information as required by the Commissioner to determine whether the insurer meets the standards and requirements of the act and this chapter.]

(d) After placement on the eligible surplus lines insurer list, [an alien insurer shall submit the following to the Department through a surplus lines licensee:] a nonadmitted insurer shall notify the Department within 10 business days if the nonadmitted insurer no longer satisfies the requirements of section 1605 of the act.

[(1) Changes or additions, or both, to the information in subsection (c)(7) and (4)(i) within 10-calendar days of the occurrence.

(2) Changes or additions, or both, to the information in subsection (c)(1) and (5) within 30-calendar days of the occurrence.

(3) A certified copy of the information in subsection (c)(3)(i) within 30-calendar days after the date required for filing in its domiciliary jurisdiction. A copy of the information in subsection (c)(2), (3)(ii) and (4)(ii) shall accompany the filing.

(4) Additional items as may be required by the Commissioner to determine whether the insurer continues to meet the standards under the act.]

(Editor's Note: The following section is new and printed in regular type to enhance readability.)

§ 124.11. Exempt commercial purchaser.

For the Department to determine whether a surplus lines licensee has placed business for an exempt commercial purchaser under section 1610(a.1) of the act (40 P. S. § 991.1610(a.1)), the surplus lines licensee shall file, with the Department or its designee, a written declaration reporting the transaction on a form prescribed by the Department.

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